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VIMC: A Leader in Localizing China's Video security Industry

Beijing,Sept. 16, 2014/www.forbes.com/ If artificial intelligence in our country can formulate the systematic promotion plan in the strategic aspect, it will be a great chance to realize breakthrough.

On May 1, 2011, a new video and audio codec standard, the SVAC standard, was officially promulgated in China¡¯s video security industry. The SVAC (security Video and Audio Coding) standard was jointly developed by a China-based and US-listed small cap, VIMC (NASDAQ: VIMC), in partnership with the First Research Institute of the Ministry of Public Security of China.

VIMC is a little covered small cap stock that is riding the waves of China¡¯s security industry¡¯s localization. VIMC is approaching the inflection point of breakeven in FY 2014 and will likely to accelerate earnings per share from $0.08 to $0.45 from 2014 to 2015. Given the early stage of the industry¡¯s transformation, the rapid growth in company¡¯s business, the tremendous operating leverage primary in R&D and being the only Chinese video security solution provider listed in the U.S. we believe that the stock should trade at 25x EPS 2015 or higher. Therefore our price target is $11.25, or 76% upside from its current price of $6.4 today (September 15, 2014).

Today in China, most industry players use international standards such as H.264 or MPEG4. Hikvision (SZ: 002415) and Dahua (SZ: 002236) are the industry leaders in this standard, with approximately 60% combined market share. VIMC, which co-developed the new SVAC standard, a newcomer, now offers a turnkey solution that includes standard setting, chip and algorithm, software systems, and project implementation. When and if the SVAC standard is implemented on a mandatory basis, VIMC is positioned to emerge as a leading player in the process of localizing China¡¯s video security industry. We believe this will happen sooner than later, given the current international geopolitical dynamics.

Growth in the security Industry

During the 11th Five-Year Plan, the domestic safety and security industry grew at 23% CAGR. In March 2011, the government officially approved the 12th Five-Year Plan for China¡¯s Safety and Security Industry. According to the plan, in 2015 the total industry is expected to reach a size of RMB500bn. Even if the industry grew at 0% CAGR, the video security market would exceed RMB100bn, accounting for more than 50% of the safety and security industry.

Given the current regional geopolitical dynamics we believe Asia will become the largest security market globally, with China leading the growth. Memoori, a British market research firm, also believes that the market share of North American and European countries is being preempted by Asian countries, especially China due to its concern over domestic unrest.

Deficiencies in the Current Standard

1. The current standard and core chip are subject to foreign institutions.

This has become a national security concern. Foreign companies have controlled the standard and core chip technology for a long time. This May, the Chinese government stopped purchasing the Windows 8 operating system and buying foreign security software and devices. The government seems to think that without independent core chips and systems, national security could be compromised. The currently used video security system video / audio codec technology is based on the H.264 / MPEG-4 standard. The algorithm is developed largely by ITU-T, ISO / IEC and other foreign research institutions. The central government plans to change that.

2. Fuzzy images

Criminal investigations require high resolution images. However, high video resolution requires high processing capacity and consequently high costs. To improve the resolution with a reasonable budget, more advanced compression technology is required.

3. Lack of audio recording system

Currently, almost all the video security systems are not able to record sound. For instance, the security system was unable to record any sound with the violent crimes in Urumqi on July 5 and the Guizhou incidents on Jun 28 this year. The lack of access to audio recording severely delays timely reaction by authorities to sudden incidents. Recently, many locations have started to integrate audio systems. However, due to technical reasons and cost control concerns, the sound is often distorted.

4. Lack of face recognition

The majority of security systems lack face-recognition function. In addition, even if the security system could capture facial images, the state lacks a database for facial recognition. High-definition, big data (including face recognition databases), standards and independent production of chips are a growing trend.

As a result, we see both new demand and upgrading demand for new generation security systems. We expect this industry to stay strong regardless of China¡¯s macro economy.

SVAC to Become Gold Standard

With rising domestic security concerns such as terrorist attacks and violent incidents, the central government has started to promote SVAC with the intention to strengthen national security and fight terrorism. The government has adopted a series of initiatives to promote SVAC, including building an SVAC industry alliance, designating Guangdong as the demonstration province for SVAC roll-out, naming SVAC standard as the preferred standard in the national standard GB/T28181, and supervising the implementation of SVAC by the Ministry of Public Security and other ministries. More and more companies have joined the SVAC standard alliance as Dahua, Hikvision, and other leading companies have begun to support it.

After being promoted by the Ministry of Public Security, the Ministry of Industry and Information Technology, and the Standardization Administration, the SVAC standard was given priority for all security security projects in Shanxi and Hebei provinces. Earlier this year, the Ministry of Public Security mandated that SVAC must be implemented in all new projects in Guangdong Province after October 2014. It¡¯s likely that the state will enforce SVAC as a mandatory standard within the next 6 months. SVAC is expected to be implemented in Safe City project and other key nationwide projects, as well as those run by the military. (Author: Junheng Li)

Company Contact:

Mr. Hongqian Li

Phone: +86 (10) 5884 8898

E-mail: lihongqian@vimicro.com


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